Affordable Housing

01May09

An anxious and frustrated crowd of leaders in the affordable housing world descended on the Department of Housing and Community Development in Boston late last February. Their modest aim: to save affordable housing as we know it.
Catherine Racer, associate director of DHCD, told the crowd of more than 100 that the $2.25 billion allocated to the states by President Obama’s stimulus plan could ease the pain, but her optimism was tempered by the acknowledgement that finding investors for affordable housing during the current economic crisis “would be the biggest challenge we have faced.”
Reached at his office on the campus of Northeastern University in Boston, Barry Bluestone puts a finer point on the issue. “It’s the perfect storm,” says the professor of political economy and director of the Center for Urban and Regional Policy.
Over the past two years it has become increasingly difficult for developers to stitch together the patchwork of funding needed to push affordable housing projects to completion. Some developers have had to shut down back hoes and earth movers and call off construction crews as funding evaporated midstream.
Now, at a time when credit is seizing and investors are disappearing, the production of affordable housing projects in Boston has ceased all together. Worse, this is happening when unemployment is on the rise and the need for affordable housing is certain to skyrocket.
“I’m going to sound like a broken record here, but what we’re seeing in this industry is unprecedented,” says Richard Becker, the director of asset management at the Massachusetts Housing Investment Corporation in Boston. MHIC is a private lender and investor specializing in the financing of affordable housing and community development.
At MHIC Becker has seen the $40 million to $50 million normally invested with him each year for affordable housing drop by one-half in 2008. State-wide, of the 39 affordable housing developments allocated in 2007 and 2008 only eight have secured complete funding. Until these 31 stalled projects push through the pipeline—a Hurculean task for an industry in crisis—not a single affordable unit will be ready for a family who needs it in 2009.
Sarah Barcan is a senior project manager at the Community Economic Assistance Corporation in Boston. CEDAC is a public-private, community development finance institution that provides technical assistance and pre-development lending, to non-profit organizations involved in housing development. Barcan says the way affordable housing has been funded for the past 20 years is in crisis. Even the most experienced and accomplished developers “are just unable to get it done now.”
The mechanisms for funding affordable housing are in such shambles CEDAC has filed suit against two non-profit developers for breach of loan agreement. CEDAC is suing Harvard Street Neighborhood Health Center, Inc. for $125,000 and Veterans Benefit Clearinghouse Development Corporation for $265,000 to recoup money loaned for pre-development costs associated with affordable housing projects begun by the groups.
Neither CEDAC nor the agency’s attorneys would comment on the ongoing litigation. Directors of HSNHC and VBCDC did not return phone calls. But this much is clear: both projects are casualties of a broken industry that is languishing at the mercy of a larger economic and financial crisis.
At issue is the principal tool for financing affordable housing—the Low Income Housing Tax Credit. The LIHTC program helps people such as Becker and Barcan procure dollars from banks and private investors to complete the funding necessary to build affordable housing projects.
The LIHTC program began in 1986 to provide the private market with an incentive to invest in affordable rental housing. Federal housing tax credits are awarded to developers of qualified projects. Developers then sell these credits to investors to raise capital for their projects, which reduces the debt that the developer would otherwise have to borrow. Because the debt is lower, a tax credit property can offer lower, more affordable rents.
In turn, investors receive a dollar-for-dollar credit against their federal tax liability each year over a period of 10 years. The amount of the annual credit is based on the amount invested in the affordable housing.
A financial industry soon developed around the exchange of these tax credits. Until recently the industry helped create 50,000 to 80,000 affordable units a year during the relative prosperity of the last 20 years in the U.S. What previously had been a responsibility of the federal government has become a privatized industry vulnerable to the vagaries of the market—both good and now bad.
“The aggregate demand for the LIHTC has dropped significantly.” As a consequence, says Davis, “for the first time in the history of this program we’re seeing drops in pricing for the LIHTC.”
For some investors tax credits just aren’t desirable when they have less profit to protect, says Bob Van Meter, executive director of Local Initiatives Support Corporation in Boston. LISC lends money and gives grants to community development corporations and other developers of affordable housing using money acquired through LIHTC investments.
“When there are no profits for the tax credits to shelter, the program doesn’t work very well,” says Bluestone of Northeastern. “And we’re all non-profits now.”
Other investors simply do not have the cash for an industry desperately lacking investor capital. Fannie Mae and Freddie Mac, the failed mortgage giants bailed out by the government last September, accounted for 30 percent to 40 percent of the LIHTC market, says Van Meter. Other investors were Citicorp and JP Morgan Chase. “The tax credit market is just in collapse,” he said.
Provisions in President Obama’s stimulus bill intend to kick start affordable housing development by allowing states to sell back their unused credits from prior years for 85 cents on the dollar. According to a report by David Smith of the Affordable Housing Institute and Recap Advisors, this could amount to nearly $5 billion nationally to be pumped into affordable housing projects.
In the greater Boston area in 2008, a family of four would need an annual income no more than $85,000 to qualify to live in affordable housing.
The stark reality is that with fewer LIHTC dollars, fewer affordable housing units will be built. As the national unemployment rate nears 8 percent, up over three points from this time last year, the demand for affordable housing will only continue to grow. “The irony,” says Don Bianchi, senior policy advocate at the Massachusetts Community Development Corporation, “is that as all this is going on the need has only become greater.”
Back at the DHCD, a room full of people who traffic in the business of affordable housing were still scratching their heads as they tried to make sense of their crippled industry. Speaking to the crowd, Associate Director Racer urged the leaders in the industry to “take a step back and take a deep breath” as they prepare for the work ahead of them.